India likely to ease restrictions for foreign online retailers in July

Updated
Thu 5 Jun 2014, 8:58 PM AEST

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Indian consumers may soon have a wider choice with the Modi government expected to allow global online retailers to sell their own products as early as next month.

Parivartan Sharma: Reuters

India could allow global online retailers to sell their own products as early as next month, removing restrictions that have held back competition in one of the world's biggest retail markets.

The decision, likely to be announced in or alongside the budget, is one of the first tangible signs of economic reform by prime minister Narendra Modi's government.

The move could allow the government to circumvent political opposition to opening up India's $US500 billion retail sector to global retail giants such as Wal-Mart Stores Inc.

Officials reportedly believe a more robust online retail sector will spur manufacturing and consumption, helping revive an economy that has grown at below 5 per cent for two years, the longest period of sub-par expansion since the late 1980s.

"Most stakeholders support foreign direct investment," a senior government official said, referring to e-commerce.

"We have pitched for opening it up completely."

The official declined to be named because the matter was confidential.

When asked about the decision, a spokesman for India's commerce and industry ministry declined to comment.

Industry surveys say e-commerce could contribute up to 4 per cent to India's economy by 2020 from under one per cent now.

The proposal was put forward to prime minister Modi when he met top bureaucrats on Wednesday to brief them on his goal of streamlining government, one of the officials who attended the meeting said.

Although New Delhi has been discussing opening up the sector since last year, sources say a decision is imminent.

"The way the government is initiating discussion, it is very clear that they are extremely serious about it," an executive with a global online retailer said.

"They understand this will help small traders to grow their business, expand and reach out to a larger market."

US president Barack Obama has set a goal of quintupling bilateral trade with India to $500 billion, highlighting sectors like retail, defence, drugs and energy as areas where the US administration is seeking greater access.

Two Indian newspapers reported on Thursday that Mr Modi would meet president Obama in Washington in September, where trade and investment are likely to be high on the agenda.

Mr Modi's Bharatiya Janata Party (BJP) has been a vocal critic of the previous government's policy to allow foreign multi-brand retailers, but he has tried to reassure the politically influential small traders who stymied that decision about online retail.

"We should not worry about these things," he told a gathering of small traders in February while he was on the campaign trail.

"Our children have taken IT to the world. We'll have to embrace it."

Mr Modi will eventually decide investment guidelines and the limits of foreign ownership in online retail, but the sources said the rules will be clearer than those the previous government put in place for foreign investment in the supermarket sector.

This regulatory uncertainty had discouraged global chains from entering India.

An Amazon.com Inc spokesperson in India said opening up the sector would be good for both consumers and Indian businesses, and spur infrastructure development.

Peter Faricy, head of the company's global marketplaces, said India was a promising market.

"I can't speculate on what might happen going forward, but I can tell you that we're very pleased about the launch of the business so far out there," Mr Faricy said.

Deepa Thomas, spokeswoman for eBay in India, said the online retailer was also excited about the opportunity.

Global online retailers like Amazon and eBay are currently banned from selling products they have sourced themselves, and must rely on third-party suppliers.

Their platforms, which they own fully, are marketplaces for these outside suppliers.

The government is likely to end this ban, paving the way for global retailers to bring their formidable supply chain, and cheaper goods potentially boosting consumption and benefiting small manufacturers and traders in India.

Opening up the online retail business for foreign direct investment is also widely expected to eliminate middlemen, leading to lower transaction, overhead, inventory and labour costs according to industry officials.

Mr Modi, who last month won India's first outright parliamentary majority in three decades, wants to kick start the sluggish economy by winning back domestic and foreign investor confidence.

Regulatory uncertainty under the previous government prevented foreign supermarket chains from setting up shop. So far, only Britain's Tesco PLC has announced an investment.

In its election manifesto, the ruling BJP vowed to ban foreign supermarkets.

Lifeline to local online retailers

E-commerce is growing at the compound annual growth rate of 34 per cent in India, according to a report from consultants Digital-Commerce, IAMAI-IMRB, but still lags behind other emerging nations, including China.

Online travel services currently account for over 70 per cent of consumer e-commerce transactions.

Sales of retail goods online were $1.6 billion last year, according to research firm Forrester. This figure is expected to swell to $76 billion by 2021, according to consultancy Technopak.By comparison, China's business and consumer e-commerce sales are projected to surpass $180 billion this year.

If approved, the policy will also provide access to much-needed capital to local online businesses like Flipkart, marketplace Snapdeal and fashion retailers Myntra and Jabong.

All online retailers in India are losing money due to high advertising costs, heavy discounts and an underdeveloped logistics network.

Only 18 of the 52 e-commerce start-ups in India, which raised $700 million in venture capital funding in the three years ending 2012, were able to raise follow-on investments last year, according to investment bank Allegro Advisors.

Most Indian online retailers are aggressively scaling up in an attempt to compete with Amazon, which slashed prices and improved delivery standards after entering India last year and is looking to acquire smaller retailers.